Protection of Rights of Minority Shareholders: Legal Framework and ...

86 Protection of Rights of Minority Shareholders: Legal Framework and Enforcement 

Spotlight on: 4 

Protection of Rights of Minority Shareholders: 

Legal Framework and Enforcement 

Katarina Đulić 

Tanja Kuzman * 

An inadequate legal framework for the protection of minority shareholders’rights, as well 

as specific forms of privatisation in Southeast European countries resulted in the lack of 

interest of minority shareholders in using their time, money and other resources in “fight” 

against the management of privatised companies. Because of that rights of minority 

shareholders are gaining in their importance. A set of new laws which regulate this field 

was adopted in 2011 in Serbia. The purpose of this paper is to analyse the legal framework 

regarding the level of protection of minority shareholders’ rights under new laws, particularly 

in relation to the extent of their rights under EU directives and recommendations 

of the European Commission. The aim of the analysis is to identify recommendations for 

further improvement of protection of minority shareholders rights. 

I INTRODUCTION 

Effective protection of property or shareholders is achieved only if shareholders are protected by a legal norm, if 

the legal norm is legitimate, and if it is effectively sanctioned. Therefore, protection of shareholders has its legal and 

actual aspect. Legal protection of shareholders defines shareholders’ position in laws and accompanaying regulations. 

In that regard, the most important are laws that regulate companies (shareholders’ position in a company) and laws 

that regulate the security market (shareholders/investors’ position in the capital market). However, if a violated right 

cannot be protected by the shareholder in front of coercive authorities (courts, security committee, etc.), the shareholder 

shall not enjoy effective and actual protection even when he/she is protected by “the right on the paper”. Namely, 

even if the set of rights granted to the shareholder is satisfactory because advanced legal solutions have been adopted 

through law reform, it will become meaningless if: 1) the rules are massively violated due to the lack of understanding 

and/or legitimacy, and 2) a shareholder cannot ensure their enforcement due to poorly managed institutions (this is 

often a case in countries in transition). In this sense, legitimacy and enforcement , i.e. enforcement of laws, quality 

of institutions which (forcedly) implement legal norms, determine effectiveness of protection of investors (an actual 

level of protection) even independently of a formally defined set of laws. 

Laws and the quality of their enforcement, in particular forced enforcement by regulatory bodies and courts, are key 

elements of both corporate governance and financial system of a country. Therefore, laws and the quality of their 

enforcement are important in countries in transition because when a legal system (laws and their enforcement) does 

not protect external and minority shareholders, corporate governance and external financing do not work. Since 

protection of shareholders is crucial for the quality of corporate governance and level of development of the capital 

market, the question is whether Serbian legislation provides sufficient protection to minority shareholders? Numerous 

studies 1 have shown that the size of the capital market in a country, the number of initial public offerings and 

ownership structure of companies may be both conceptually and empirically explained by the quality of legal protection 

the country provides to external investors. In terms of connection between legal protection of shareholders 

and ownership structure of a company, several studies have shown that the countries with a low level of protection 

of shareholders rights have greater level of concentration of ownership/control than the countries with greater quality 

of protection of shareholders. 2 This may serve as a basis to conclude that under conditions of poor protection of 

ownership rights, concentrated ownership has become a substitute for legal protection. Since reforms in transitional 

countries are conducted within underdeveloped and poorly managed institutions, protection of investors is often of 

insufficient quality (regardless of the quality of formal and legal norms), which results in the ownership concetration 

3 . Hence, the owner/shareholder, in fear of a possible loss of control and in order to freeze the ownership and 

control structure, having in mind that the capital market in transitional countries is underdeveloped and that it is not 

* The authors want to thank Aleksandar Djodjević, Ana Filipović, Aleksandar Kalebić and Ana Stiković who contributed to the writing of this paper. 

1 La Porta et al, 2000 

2 La Porta et al, 1998; La Porta et al, 1999; Claessens et al, 2000 

3 Berglof and Claessens, 2004

Quarterly Monitor No. 30 • July–September 2012 

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a serious alternative for financing through a bank loan, has no interest in participating in the capital market, which 

leads to the closing of the company and at the macro level to the decline in market liquidity. This also brings us to 

the basic statement which suggests that high quality legal protection of shareholders promotes development of the 

financial market and moreover that the protection of shareholders encourages development of the equity market. 

A study has shown that countries with good quality of protection of shareholders have higher capitalisation of the 

stock market, a larger number of listed securities per capita, and a higher rate of initial public offerings relative to the 

countries with poor protection of shareholders. 4 

In addition to all the above stated facts, the importance of protection of rights of minority shareholders plays an 

important role in Serbia given the fact that the privatisation process has not been completed yet. The privatisation 

process was initiated in ’90s with insider privatisation process which led to the formation of a specific type of insider 

owner (worker-shareholder), whereas the second wave of privatisation after 2001 created owners through external 

privatisation process and free distribution of shares to all citizens who met criteria envisaged by the law. Having in 

mind that the previous major privatisation was carried out through free distribution of shares to citizens (e.g. the 

case of the Petroleum Industry of Serbia), and that soon many public companies are going to be opened, which will 

put a large number of Serbian citizens into position of a minority shareholder, this paper will look into protection of 

minority shareholders rightd in public joint stock companies in Serbia. 

The aim of this paper is to present an analysis of protection of minority shareholders rights in Serbia by analysing new 

legal solutions adopted through Company Law, Law on the Capital Market, and Law on Takeover of Joint Stock 

Companies, because legal solutions are a prerequisite for effective protection of shareholders’ rights. Based on the 

analysis of proposed legal solutions, a conclusion on compliance of regulation in our country with the EU regulation 

in the field of protection of minority shareholders rights, whereas the analysis of effective sanctioning (i.e. forced 

enforcement by courts) goes beyond the scope of this paper. Due to that reason this paper will not contain the final 

assessment of effective (actual) protection enjoyed by the shareholder in Serbia. 


PROTECTION OF MINORITY SHAREHOLDERS 

The connection between private property and business efficiency (through corporate governance mechanisms) is 

more or less an axiom of the Western economic thought. Corporate governance mechanisms which protect shareholders 

in public joint stock companies, whose shares are traded within regulated markets, are defined by the corporate 

governance framework which contains elements of legislation, regulation, self-regulation, voluntary commitment to 

obligations, business practices, capital market conditions, level of institutions development , mechanism of forced enforcement 

of laws, etc. That framework is the result of circumstances (general and specific for individual companies 

and countries), as well as the history and tradition of a specific country. 

Investors’ rights are protected and often granted by a legal system. They are present in different laws – company law, 

securities law, bankruptcy law, etc. All the laws and quality of their enforcement, particularly forced enforcement 

by regulatory bodies and courts, are essential elements of both corporate governance and financial system of a country. 

Therefore, when the legal system does not provide protection for (external and minority) owners, corporate 

governance and external financing do not work. Jensen and Meckling pointed this out in 1976: “This view of the 

company points up the important role which the legal system and the law play in social organizations, especially, 

the organization of economic activity. Statutory laws set bounds on the kind of contracts into which individuals and 

organizations may enter without risking criminal prosecution. The police powers of the state are available and used to 

enforce performance of contracts or to enforce the collection of damages for non-performance. The courts adjudicate 

conflicts between contracting parties and establish precedents which form the body of common law. All of these 

government activities affect both the kind of contracts executed and the extent to which contracting is relied upon.“ 

For the purposes of the analysis, mechanisms of protection of shareholders can be categorised into internal and external. 

Internal mechanisms of protection of shareholders refer to structures and processes within the company which 

enable managers to effectively manage the company, and shareholders to supervise and control managers. These 

internal mechanisms in Serbia are defined primarily by the corporate law, i.e. Company Law. External mechanisms 

for protection of shareholders relate to the development of capital markets, regulation and monitoring of the 

market by relevant regulatory body, operation of other capital market institutions, operation of courts, transparency 

4 La Porta et al, 1997



of company’s operations, reporting of the investing public about company’s operation, opportunity of a company to 

access capital, and opportunity for an investor to get out of a company by liquidating the property share. Sale of the 

property share is the final measure which the shareholder may resort to in case he/she is dissatisfied with the way 

the manager manages his/her capital. The capital market in Serbia is defined by the security regulation, primarily 

by the systemic Law on the Capital Market. However, for complete analysis , it is necessary to refer to the Law on 

Takeover of Joint Stock Companies which regulates the external corporate governance mechanism with a strong 

“disciplinary“ effect for mismanagement. Since corporate governance in Serbia is at its beginnings, the practice is 

underdeveloped and self-regulation and voluntary commitment to obligations are minimal. Therefore, we look for 

mechanisms for protection of shareholders in regulations, primarily in the three above stated laws. 

Although regulation analysis is crucial for the assessment of quality of protection of shareholders in a country, an 

institutional aspect is crucial for determining actual protection of the investor, which proved to be more relevant in 

countries in transition (Berglof and Claessens, 2004). 

A detailed analysis of voluntary and forced enforcement of legal norms which protect the shareholder in Serbia goes 

beyond the scope of this paper. The paper shall include the first step in the assessment of the quality of protection of 

the shareholder in Serbia, focusing on the analysis of protection provided by legal norms as defined in the recently 

adopted Company Law, Law on the Capital Market, and in the recently amended Law on Takeover of Joint Stock 

Companies. Namely, legal norms providing protection to the shareholder may be classified in one of three categories 

of material legal norms: (1) general and special shareholders’ rights, (2) operation of the Shareholders Assembly, and 

(3) transparency. The first and second category of norms protecting the shareholder are regulated by the Company 

Law, and the third category is primarily regulated by the Law on the Capital Market. At the same time, takeovers are 

also a powerful mechanism for protection of the shareholder as the experience has shown that companies with poor 

business operation often become a target of (hostile) takeovers on developed markets, where the acquiring company 

“saves“ shareholders of target companies from mismanagement by acquisition. Namely, the company that is trying to 

take over another company is, as a rule, ready to buy shares of the target company at a price higher that the market 

price (to compensate shareholders of the target company, and for the sale of control). After taking over the company, 

the acquiring company, as a rule, dismisses the previous management and establishes a new one for the purposes of 

improving profitability of the company being taken over. Therefore, to make the assessment of external corporate 

governance mechanisms, the authors will also review the Law on Takeover of Joint Stock Companies. 

As a reference framework for the assessment of quality of regulation authors have taken relevant European directives 

due to the fact that Serbia will join the European Union with the responsibility to adjust its regulation to the EU 

regulation. In addition, the EU regulation has, due to the long tradition of shareholding and developed financial 

markets, been an example of good practice for Serbia. The purpose of analysis of the regulation is to assess to what 

extent our regulation reflects the best available world practice, and whether there are significant differences. If differences 

are identified, recommendations for the improvement of the regulation in accordance with best practice will 

be given, taking into account capacities of the Serbian capital market and Serbian corporate governance institutions 

for the implementation of recommendations. 

RIGTHS OF SHAREHOLDERS AND OPERATION OF THE ASSEM BLY 

The new Company Law (or CL) (“Official Gazette of RS” No. 36/2011 and 99/2011), published on 27 May 2011, 

entered into force on 4 June 2011, and has been fully practically enforced since 1 February 2012 (except Article 344 

paragraph 9 and Article 586 paragraph 1 item 8, which will become enforceable on 1 January 2014). The Law is 

relevant for the assessment of quality of the regulation concerning general and special rights of shareholders as well 

as the regulation which regulates operation of the Shareholders’ Assembly. As a reference framework for the analysis 

serves the EU directive which regulates exercise of specific rights of shareholders, respectively the stated subject 

matter, Directive 2007/36/EC of the European Parliament and of the Council of 11 July 2007 on the exercise of 

certain rights of shareholders in listed companies. 

General and specific rights of shareholders 

Shareholders acquire a series of rights by buying shares. The main reasons which incite an investor to buy shares 

(instead of any other type of financial assets) are: (1) control, (2) dividends, and (3) capital gain (IFC, 2011). In terms


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of control, it is primarily gained by using the voting right. Namely, by voting at the Shareholders’ meeting, the shareholder 

appoints the company’s board by which he/she may directly impact the decision making procedure in the 

company. Regular payments of dividends are crucial for portfolio investors which seek to ensure predictable cash 

inflows from shares. Finally, capital gain (or capital loss) is realised by the sale of shares and respectivelytransfer of 

ownership of shares. 

The Law distinguishes ordinary and preference shares (Art. 250). Ordinary shares entitle their holders with the right 

to participate and vote at the Shareholders’ meeting, right to receive a dividend, right to participate in the liquidation 

or the bankruptcy estate, pre-emptive right to acquire ordinary shares, and other financial instruments exchangeable 

for ordinary shares of subsequent issues, as well as other rights envisaged by the Law or Articles of Associations 

(Art. 251). These are standard rights of shareholders, noting that the CL codified good practice that one share always 

grants the right to one vote. According to the CL, there is only one class of ordinary shares and they always grant the 

same rights to their holders. Also, these shares cannot be converted into other financial instruments. 

In view of preference shares, they can grant to their holder one or more preferential rights, however, as a rule, they do 

not hold the voting right. Preferential rights primarily refer to the right to a dividend which is payable as priority in 

a predetermined monetary amount or in the percentage of the nominal value of a preference share, and the right to 

priority in receiving payment arising from the liquidation or the bankruptcy. Even the shareholder with preference 

shares has the pre-emptive right to acquire newly issued shares from the same class (Art. 253). We herewith state that 

this has also been regulated in a standard manner, and that the pre-emptive right is considered to be good practice 

because it protects existing shareholders from dilution of the ownership structure. 

In addition to this, we will also refer to some specific rights of shareholders that are relevant and envisaged by the 

CL. The CL grants the shareholder with the right to appeal to a decision adopted at the Shareholders’ meeting in 

cases envisaged by the CL (Art. 376), also with the right to transfer shares and the right that shares cannot be limited 

or abolished in public joint stock companies, which is in accordance with good practice (Art. 261), the right of 

dissenting shareholders to require purchase of shares by the company which is regulated in detail (Art. 474–476), the 

right to have an insight into the list of shareholders (Art. 331), the right to submit a derivative lawsuits (lawsuits on 

behalf of the company) exercised by the shareholder owning or representing 5% of the company’s share capital, and 

which may be submitted in cases specified by the CL (Art. 49, 79, 472), and the right to assess an in kind contribution 

to the company. The right to information is regulated in more detail in the new CL (relative in comparison to 

the previous Company Law), and it envisages that the company shall enable access to required documents and information 

if they are available for insight and download from the company’s website (Art. 465), which is good practice. 

In terms of the above stated Directive 2007/36, it does not deal with described rights of shareholders. It only states 

in Article 4 that the company must ensure equal treatment of all shareholders who are in the same position in terms 

of participation at the Shareholders’ meeting and exercise of voting rights. Our CL in Article 269 explicitly envisages 

that all shareholders shall be treated in an equal manner under equal circumstances, and this shall implement 

recommendation of the Directive 2007/36 and best practice. Please note that equal treatment of shareholders is also 

envisaged by Article 64 of the Law on the Capital Market. Therefore, we may conclude that the CL is in accordance 

both with the Directive 2007/36 and with recognised good practice regarding general and specific rights of shareholders. 


Operation of the Shareholders Assembly 

The CL envisages two types of Shareholders’ meetings – regular meetings, which are held at least once a year, and 

extraordinary meetings, which are convened if necessary (Art. 364 and 371). The Law explicitly states competencies 

of the Shareholders Assembly (Art. 329) and they include all the competencies which good practice deems standard, 

in particular: appointing and dismissing members of the company’s board (both executive and non-executive directors 

in the one-tier system and members of the supervisory board in the two-tier system); control of the company 

(by appointing an independent external auditor, determining his/her fee, adopting financial statements and auditor’s 

reports, appointing members of the audit committee under specific conditions, etc.); determining remuneration for 

directors, i.e. members of the supervisory board, and profit allocation; adopting the Articles of Association and 

company’s Rulebook; increasing and reducing share capital; deciding on statutory changes and changes to the legal 

form; deciding on acquisition and disposing with high value assets; deciding on re-organisation and liquidation of 

the company, etc.



In terms of the operation of the Shareholders Assembly, we will look into the rules pointed out by the Directive 

2007/36. 

Article 5 of the Directive 2007/36 refers to information that must be submitted to shareholders prior to the Shareholders’ 

meeting. The Directive 2007/36 envisages that notification on convening the Shareholders’ meeting must be 

sent to shareholders not later than 21 days prior to the meeting. Our CL not only implements this recommendation 

but also sets rigorous standards. It actually envisages that the invitation for the regular meeting must be sent not later 

than 30 days prior to the date of the meeting (Art. 365), and the invitation for the extraordinary meeting should be 

sent not later than 21 days prior to the date of the meeting (Art. 373). Article 5 of the Directive 2007/36 further 

envisages that the invitation for the Shareholders’ meeting should be sent in the manner which will ensure fast and 

equal (non-discriminatory) access for all shareholders. Our CL (Art. 335) envisages that the invitation shall be sent 

either to shareholders’ addresses listed in the single register of shareholders or by publishing on the company’s website 

and business register’s website (whereas a public joint stock company shall be obliged to publish the invitation also 

on its website and on the website of the market containing its shares). Such a solution is also in accordance with the 

Directive 2007/36 (i.e. the result required by the Directive is accomplished) and with good practice. 

In terms of information to be included in the notification about the Shareholders’ meeting, the Directive 2007/36 

states the time and location of the meeting, an instruction on rights of shareholders related to participation in the 

operation of the Assembly, and clear and precise notification about rules for obtaining them, record date, notification 

about methods of downloading materials for the meeting, and the website where materials can be found. In Art. 

335, the CL almost literally adopts recommendations from the Directive 2007/36. The recommendation that specific 

materials for the Shareholders’ meeting must be available at least 21 days has been adopted, except that the CL 

explicitly lists only specific materials for the meeting which must be placed at disposal to shareholders (Art. 367). 

Article 6 of the Directive 2007/36 refers to the right of shareholders to amend the agenda. The Directive 2007/36 

envisages that the right to propose the agenda shall be granted to one or more shareholders having at least 5% of 

shares with the voting right, and requires from member states to set a clear deadline for the submission of a proposal 

by their regulation, and requires commitment from the company to submit a revised agenda to all shareholders in a 

timely manner so that they could exercise their voting right. The CL fully achieves the result required by the Directive 

2007/36 as it grants the right to one or more shareholders having at least 5% of shares with the voting right to 

submit a proposal for addendum to the agenda (Art. 337), and it sets a deadline of 20 days before the regular meeting, 

i.e. 10 days before the extraordinary meeting, for the submission of a proposal. A public joint stock company shall be 

obliged to publish the proposal at its website the latest on the following working day after the date of reception of the 

proposal. Please note that in the previous Company Law, the right to amendments and addenda to the agenda could 

be exercised by the shareholder having or representing 10% of shares, therefore, the CL signifies an improvement. 

Therefore, it may be concluded that even in this aspect, the CL is in accordance with the relevant Directive and best 

practice codified therein. 

Article 7 of the Directive 2007/36 treats conditions for participation and voting at the Shareholders’ meeting. Article 

7 envisages determination of the record date, which should not be set within 30 days prior to the date of the 

Shareholders’ meeting. Also, the Article recommends that participation in the Shareholders’ meeting should not be 

conditioned by requests to deposit shares, register or transfer to a third party, nor it is recommendable to pose restrictions 

on the transfer of shares in the period from the record date to the meeting date. The CL envisages that the 

record date shall be the tenth day prior to the meeting date (Art. 331) and prescribes a procedure for participation at 

the Shareholders’ meeting of those shareholders who transfer shares after the record date and before the meeting date 

(Art. 331(3)). In terms of this, the CL is in conformity with Article 7 of the Directive 2007/36. Still, it is necessary to 

mention that Art. 328(3), which allows for the Articles of Association to determine the minimum number of shares 

which the shareholder must have to obtain the right to personal participation in the Shareholders’meeting, is not in 

accordance with good practice and represents a concession to the companies with a large number of shareholders. The 

CL to some extent mitigates this provision by stating that the threshold for personal participation at the Shareholders’ 

meeting cannot exceed 0.1% of the total number of shares of an appropriate class. 

Article 341 of the CL almost literally codifies Article 8 of the Directive 2007/36 which refers to participation in 

the Shareholders’meeting by electronic access. The CL allows electronic participation in the Shareholders’meeting 

by the Articles of Association or Rulebook as follows: (1) by broadcasting the Shareholders’ meeting in real time; 

(2) by two way broadcasting of the Shareholders’ meeting in real time, which enables addressing of shareholders to


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the Shareholders Assembly from another location; and (3) with a mechanism for electronic voting, either before or 

during the meeting, without the need to appoint a representative who would physically attend the meeting. Electronic 

participation could be limited only due to the need to identify the shareholder and due to the safety of electronic 

communication. 

Similarly, Art. 342 of the CL elaborates on recommendations referred to in Article 9 of the Directive 2007/36 which 

regulates the right to asking questions and obtaining answers. In terms of this, the CL states that the shareholder 

who has the right to participate in the operation of the Shareholders Assembly shall have the right to ask a question 

to directors (i.e. members of the supervisory board) which relate to the operation of the company and to items on 

the agenda. Director, i.e. member of the supervisory board, shall be responsible for providing an answer to the shareholder. 

The answer may be omitted only due to explicitly stated reasons in the CL, which are in accordance with 

the Directive 2007/36. 

Articles 10 and 11 of the Directive 2007/36 elaborate on the rules concerning proxy voting. The CL adopted all recommendations 

of the Directive by elaborating them in Art. 344-349. In terms of proxy voting, we shall briefly refer 

to the most important rules. Namely, any shareholder has the right to authorise a specific person by proxy voting to 

participate on his/her behalf in the operation of the Assembly and to vote on his/her behalf. The proxy shall have the 

same rights as the shareholder who authorised him/her. The company cannot prescribe special conditions to be met 

by the proxy nor can it limit their number. Art. 345 states who cannot be the proxy and these restrictions are those 

stated in the Directive 2007/36. In accordance with Art. 12 of the Directive 2007/36, the CL in Art. 340 allows 

for shareholders to vote in writing without attending the Shareholders’ meeting. Article 348 particularly regulates 

a situation in which the bank which holds collective or custody accounts, in the single register of shareholders is registered 

as a shareholder on his/her behalf and for the account of his/her clients. Such a bank shall be considered to 

be the proxy for voting in relation to its clients if at the meeting it presents a written proxy to vote, i.e. an order for 

representation, issued by those clients. This request of the CL is in accordance with Art. 13 of the Directive 2007/36, 

which regulates the matter. 

Finally, Art. 14 of the Directive 2007/36 envisages the method of publishing voting results. Our CL in Art. 356 

not only adopts recommendations referred to in the Directive but also introduces restrictive rules. So, for example, 

the Directive recommends that the company should publish voting results on its website within 15 days from the 

meeting date. Our CL envisages that a public joint stock company shall be obliged to publish adopted decisions and 

voting results within 3 days from the meeting date at its website under all items of the agenda, and that the information 

should remain available at the company’s website at least 30 days. 

In conclusion, even though Serbia is still not a member state of the EU, our legislation tends to adopt best practice 

established in EU countries in the field of shareholding. In terms of this, provisions of the CL concerning rights of 

shareholders and operation of the Shareholders Assembly reflect best practice defined in this subject matter by the 

Directive 2007/36. 


TRANSPARENCY 

Organisation and corporate governance practice should be made in the manner which ensures accurate and timely 

provision of information. Transparency has a crucial role in terms of financial indicators, business results, ownership 

structure and company’s management. Accurate information that is easily attainable protects investors and contributes 

to ethical operation of the company. This is the reason why shareholders, as well as investors (potential shareholders 

and/or creditors), must have access to regular, accurate, comparable (standardised) and voluntary detailed 

information. Awareness of the fact that a minimum amount of materially important information (financial and 

business results, business objectives, ownership structure, remuneration policy for members of the board of directors, 

transactions between related parties, foreseeable risk factors, information about employees and other interested parties, 

etc.) must be regularly published, is still being raised in Serbia. Results of previous research have clearly indicated 

that transparency and publication represent the biggest problem for joint stock companies in Serbia. Please note that 

this paper focuses on so called mandatory publication concerning public joint stock companies, but also other legal 

entities issuing securities through a public bid, i.e. whose securities are included in the regulated market, i.e. material 

trade platform (public company).



A systemic law that deals with this issue in Serbia is the Law on the Capital Market (or LCM) (“Official Gazette 

of RS” No. 31/2011). The Directive 2004/109/EC of the European parliament and of the Council of 15 December 

2004 on the harmonization of transparency requirements in relation to information about issuers whose securities 

are admitted to trading on a regulated market and amending Directive 2001/34/EC, with all amendments followed 

by the Directive 2008/22/EC as of 11 March 2008, Directive 2010/73/EU as of 24 November 2010, and Directive 

2010/78/EU as of 24 November 2010 (Directive 2004/109), is used as a reference framework for the analysis. The 

Directive 2004/109 is extremely extensive and its detailed analysis exceeds the scope of this paper. We shall only 

deal with provisions of the Directive that are of key importance for providing information to shareholders. For this 

purpose, we shall categorise the analysis according to types of information that should be available to shareholders, 

i.e. periodic and ongoing information, as this classification was used in the Directive 2004/109. 

Periodic information 

Art. 4 of the Directive 2004/109 envisages that the issuer (public company) must publish its financial statements within 

four months upon completion of a fiscal year, and must ensure that the financial statement remains available to 

the public at least for five years. The Article envisages that the annual financial statement must contain the following: 

financial statements with the auditor’s report; company’s operation report; and statement of persons responsible for 

preparation of the annual report that, according to the best of their knowledge, the annual financial statement is 

prepared by the application of appropriate international standards for financial reporting and that it provides accurate 

and objective information about assets, liabilities, financial position and operations of the company. Article 50 of the 

LCM fully reflects the wording of Art. 4 of the Directive 2004/109. 

With respect to semi-annual reports, it seems that Art. 52 is to some extent more detailed and more precise than 

Art. 5 of the Directive 2004/109 which regulates the same matter, but the solutions are almost identical, but more 

elaborated and more strict in the LCM. The LCM envisages that a public company must, within two months upon 

completion of the first six months of a business year, publish and submit to the security committee a semi-annual 

report which contains: summary balance sheet, profit and loss summary, summary report on changes in equity and 

summary cash flow report, all four with comparative data for the same period last year; detailed notes to semi-annual 

reports; a semi-annual report on company’s operation; and the above mentioned statement of persons responsible for 

preparation of semi-annual reports. These reports must be available for at least five years from the date of publication. 

As well as annual, semi-annual consolidated financial statements must also be published, and the same applies to a 

semi-annual auditor’s report, if the company is revising semi-annual financial statements. The LCM also envisages 

an obligation of public companies to prepare, make public and submit to the Securities Commission, quarterly reports 

which are not mentioned in the Directive 2004/109, thus setting stricter disclosure requirements than those 

set in the Directive. 

Directive 2004/109 in Art. 7 requires that member states specify in their legislation the persons responsible for the 

accuracy and completeness of data. The LCM in Art. 69 and 19 primarily envisages responsibility of the issuer, i.e. 

public company and its bodies (directors and board members), and of an independent auditor of financial statements 

included in the auditor’s report. Thus, the LCM adopted a request of the Directive 2004/109. 

Continuous information 

In terms of information about significant participation, the rule provided by Article 9 of the Directive 2004/109 has 

been fully adopted (and partially tightened). Art. 57 of the LCM envisages that when a natural person or legal entity 

directly or indirectly reaches, exceeds or falls below 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75% of the voting right 

of the same joint stock company whose shares are traded on the regulated market or multilateral trading platform, 

it is obliged to notify the Comission about this, as well as the joint stock company (Directive 2004/109 requires 

only notification of the company) and market on which shares of the company are traded with. This information is 

important for shareholders because it allows them to understand what person in a company is in a position to make 

decisions, or at least to substantially influence them. Article 58 of the LCM regulates obtaining and disposing with 

significant share in the voting right which is important for the same reasons. In the Directive 2004/109, it is regulated 

by Art. 10. In this case, a relevant provision of the Serbian law also fully adopts recommendations referred to in 

the Directive. Notification and disclosure procedures related to significant participation are prescribed in Art. 59 of 

the LCM and are fully codified by relevant Art. 12 of the Directive 2004/109.


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With respect to the public company which undergoes changes in terms of the number of voting shares, according 

to the LCM (Art. 57(4)), and in accordance with Art. 15 of the Directive 2004/109, the company shall be obliged 

to publicly disclose at the end of each calendar month, for the purposes of calculation of the above mentioned 

threshold, information on any changes and the new total number of voting shares, as well as the value of the share 

capital. Furthermore, Art. 63 of the LCM, in accordance with Art. 14 of the Directive 2004/109, envisages that if 

the public company acquires or disposes of its own voting shares, independently or through persons who act on their 

own behalf, and for the account of the public company, it shall be obliged to disclose to the public the number of its 

own shares in the absolute and relative amount as soon as possible, but not later than four days after acquisition or 

disposal of voting shares. 

Finally, Article 55 of the LCM codifies Art. 16 of the Directive 2004/109 and envisages that the public company 

shall be obliged to submit to the Commission and market on which its securities are traded with, information about 

any change made in security rights. 

We may conclude again that, in terms of transparent operation and disclosure of information relevant for investors, 

Serbian legislation has adopted recommendations of best practice distilled in relevant EU directives. Regarding 

transparency, provisions of the Directive 2004/109 regulating disclosure of information are fully reflected in articles 

of the LCM. 


TAKEOVER 

The procedure of takeover of joint stock companies in the Serbian capital market is regulated by the Law on Takeover 

of Joint Stock Companies (“Official Gazette of RS” No. 46/2006, 107/2009 and 99/2011) (hereinafter referred to as 

the TL). The EU Directive regulating takeovers (or Directive 2004/25) (Directive 2004/25/EC of the European 

Parliament and of the Council of 21 April 2004 on takeover bids - Official Journal L142, 30/04/2009) has been 

taken as a framework of reference for the analysis. The paper shall refer to the provisions that are crucial for the protection 

of shareholders. 

Art. 3 of the Directive 2004/25 prescribes general principles which member states should introduce to their legislation 

as an allowed framework (“rules of the game”) for takeover. Article 3.1 of the Directive envisages that all 

shareholders of the target company must have an equal position in the takeover procedure, and that if a person gains 

control over the company, other shareholders must be protected. The TL in Art. 3(1) and (2) fully adopts wording 

of the Directive 2004/25 adding that protection of other shareholders implies they can also, under the same terms, 

sell their shares to the bidder. Furthermore, the same Article of the Directive 2004/25 envisages that shareholders of 

the target company must be fully, accurately and timely informed about the takeover bid, so that they could adopt an 

informed decision about the takeover. Art. 3(3) of the TL is in conformity with the provision of the Directive. Other 

paragraphs of the same third Article of the Directive 2004/25, i.e. TL, as a mirror image, envisage that management 

of the target company shall be obliged, during the takeover procedure, to act in the best interest of shareholders in 

the target company (Art. 3.1(c) of the Directive 2004/25 and Art. 3(4) of the TL), that the bidder and other persons 

participating in the takeover procedure should not cause with their actions on the market distortions which would 

result in an artificial increase or reduction in the share price of the target company (Art. 3.1(d) of the Directive 

2004/25 and Art. 3(6) of the TL), that the bidder is obliged, prior to submission of the application for the approval of 

the takeover bid, to ensure necessary funds for the purchase of shares (Art. 3.1(e) of the Directive 2004/25 and Art. 

16 of the TL) and, finally, that the bidder and target company shall be obliged to carry out the takeover procedure in 

the shortest period possible, so that the target company is not prevented for a longer period of time than reasonable 

from conducting its operation (Art. 3.1(f) of the Directive 2004/25 and Art. 3(5) of the TL). 

Article 4 of the Directive 2004/25 addresses the body supervising the takeover procedure, its authorisations and 

exercising right. Thus, the Directive 2004/25 in Article 4.1 requires that member states designate a supervisory 

body, and in Article 4.5 to grant to the body relevant authorisations to effectively supervise the takeover procedure 

on the domestic capital market. The TL in Art. 41 envisages that the Security Commission shall perform supervisory 

duties determined by the law, and that the target company, shareholders of the target company, Central Register, 

commercial banks, investment companies, and other legal entities and natural persons shall be obliged to, at the 

request of the Commission, in the procedure for determining the takeover responsibility or joint action, as well as 

supervision in the takeover procedure, enable the Commission to have an insight, and submit documentation which 

the Commission deems necessary for supervision. Supervisory measures of the Commission are listed in Art. 41a of



the TL. In terms of determining a relevant law required by Art. 4.2(a) of the Directive 2004/25, Art. 1 of the TL 

envisages that the TL regulates conditions and a procedure for takeover of joint stock companies with the seat in 

the Republic of Serbia. In accordance with requests referred to in Art. 4.4 of the Directive 2004/25, the TL in Art. 

41(5) envisages that the Commission shall cooperate with foreign bodies competent for supervision of takeover, with 

bodies competent for protection of competition and prevention of money laundering, and with other bodies, for the 

purposes of carrying out activities within its scope of operation, as well as for the purposes of providing assistance to 

the bodies in carrying out their functions. Finally, Art. 4.6 of the Directive 2004/25 explicitly states that the parties 

which claim that one of their rights have been violated should have an opportunity to refer to court authorities. The 

TL has also adopted this recommendation referred to in the Directive 2004/25 because Art. 41(b) states that if the 

bidder does not publish its takeover bid, under conditions and in the manner prescribed by the law, every shareholder 

of the target company may ask through the court to purchase voting shares, under conditions in which the takeover 

bid must have been published, whereas Art. 43 of the TL stipulates that the aggrieved party may file an administrative 

dispute against the Commission. 

Article 5 of the Directive 2004/25 deals with the protection of minority shareholders, mandatory bid and a fair 

price, and is crucial for the subject of the paper. This protection primarily refers to the mandatory bid and fair price. 

The TL in different articles adopts recommendations referred to in Art. 5 of the Directive 2004/25. Thus, Art. 6(1) 

of the TL envisages that a person shall be obliged to publish the takeover bid when he/she directly or indirectly, 

independently or jointly, acquires voting shares of the target company, so that together with shares he/she has already 

acquired, exceeds threshold of 25% of voting shares of the target company (control threshold) (in conformity 

with Art. 5.1 of the Directive 2004/25). Article 22 of the TL tends to regulate the method of determining the fair 

price in all possible scenarios that may be expected in the Serbian capital market, and in this respect it fully adopts 

recommendations referred to in Art. 5.4 of the Directive 2004/25. The same Article of the TL, in accordance with 

further requirements of the Directive (Art. 5.5 and 5.6), regulates the method of determining the fair price in cases 

when compensation for payment of shares to which the takeover bid refers to is offered in securities. In particular, 

the TL requires that, in case when the bidder offers compensation in securities or in s combination of securities and 

cash, the bidder shall also be obliged to offer financial compensation as an alternative option. 

Article 6 of the Directive 2004/25 aims to ensure transparency of the takeover procedure. Requirements referred to 

in Articles 6.1 and 6.2 of the Directive 2004/25 introduce Art. 12, 18, 38(1) and 40(3) of the TL. The provisions of 

the TL envisage that the bidder shall be obliged to publish notification on its intention about the takeover within one 

working day from the date of assuming the takeover responsibility, which shall contain all the data required by the 

TL, as well as to publish the bid in the manner which is in accordance with the TL. Furthermore, the TL envisages 

that the bidder cannot change or withdraw notification on the intention about takeover after its submission, on the 

basis of which the bidder shall submit to the Commission a request for the approval of publication of the takeover 

bid. Art. 18 of the TL regulates publication of the bid and ensures that it is published and in accordance with Art. 8 

of the Directive 2004/25 which refers to the publication of the takeover bid. Art. 38 of the TL, in accordance with 

the Directive, requires from the board of the target company to notify employees in the target company in writing 

about the takeover bid from the moment of publication of notification on the intention about takeover until termination 

of the takeover procedure. In terms of the minimum content of the takeover bid which is defined in Art. 6.3 

of the Directive 2004/25, it is almost fully introduced by Art. 20 of the TL in Serbian legislation, envisaging that 

the takeover bid must contain the following: all relevant data about the bidder and persons with whom the bidder 

acts jointly (Art. 20(1)(2) of the TL and Art. 6.3(b) and (m) of the Directive 2004/25); determination of a type and 

number of shares the bidder intends and is obliged to take over (Art. 20(1)(3) of the TL and Art. 6.3(c) of the Directive 

2004/25); the price which the bidder is obliged to pay per share, method of its determining, date and method 

of payment, as well as sources and methods of providing funds for the purchase of shares (Art. 20(1)(5-6) and Art. 

22 of the TL, and Art. 6.3(d) of the Directive 2004/25); details of a conditional bid related to the minimum number 

or percentage of voting shares of the target company as a minimum the bidder wishes to acquire (Art. 11 of the 

TL and Art. 6.3(f) of the Directive 2004/25); information about all shares of the target company belonging to the 

bidder, including shares of persons with whom the bidder acts jointly (Art. 20(1)(3) of the TL and Art. 6.3(g) of the 

Directive 2004/25); all conditions of the bid (Art. 20(1)(11) of the TL and Art. 6.3(h) of the Directive 2004/25); determining 

objectives of the bidder and its intentions related to the target company to be taken over in case of success 

of the takeover bid (Art. 20(1)(10) of the TL partially approves Art. 6.3(i) of the Directive 2004/25 because it does 

not explicitly insist that the bidder states its plans related to employees in the target company); date of validity of 

the takeover bid (Art. 20(1)(8) of the TL and Art. 6.3(j) of the Directive 2004/25); when the bidder pays shares of


95 

the target company in other securities, detailed information about the securities (Art. 22(10-12) of the TL and Art. 

6.3(k) of the Directive 2004/25); and information explaining the method of financing the takeover (Art. 20(2)(2) of 

the TL and Art. 6.3(l) of the Directive 2004/25). 

Article 7 of the Directive 2004/25 requires from member states to determine validity date of the takeover bid within 

limits set by the Directive. Our legislation, ranging within the framework created by the Directive determines that, 

in Serbia, the validity date of the takeover bid shall be not shorter than 21 day and not longer than 45 days from the 

date of publication of the takeover bid in daily newspapers. 

Article 9 of the Directive 2004/25 includes obligations of the board of the target company, and it is also reflected 

in provisions of the TL. Art. 38 of the TL envisages that during the takeover procedure, the board of the target 

company may ask for a competitive takeover bid. However, from the moment of publication of notification on the 

intention about takeover, until the completion of the procedure of takeover of the target company, the board: 1) 

cannot use authorisation granted by the Articles of Association to increase the capital share of the target company 

by issuing new shares; 2) cannot adopt decisions on carrying out extraordinary activities or decisions on conclusion 

of contracts that would significantly change the balance of assets or liabilities of the target company, i.e. the board 

can carry out only regular activities related to the activity of the target company; 3) cannot adopt a decision by which 

the company can acquire or dispose of its own shares; 4) cannot publish a bid for the takeover of some other joint 

stock company. Management of the target company may carry out these activities exclusively with prior consent of 

the Shareholders Assembly, which decides on these matter by a simple majority. The Article has fully adopted recommendations 

referred to in the Directive 2004/25 that are listed in Art. 9.2-3. In terms of the statement in which 

the board of the target company provides its reasoned opinion about the takeover bid, which is regulated with Art. 40 

of the TL, the statement of the board has in the Serbian law largely reflected on all relevant issues addressed by the 

Directive 2004/25 in Art. 9.5, except that the Serbian board is not required to specifically express its opinion about 

consequences for employees in the target company. This, however, is compensated by the Serbian law with a possibility 

provided to employees in the target company to state their opinion about the bid. When the target company has 

a two-tiersystem, the executive level and supervisory board also state their opinion about the bid. 

The matter regulated by Art. 10, 11 and 12, and Articles 14-16, and 18-23 of the Directive 2004/25 does not fall 

under the scope of the TL, and, therefore, shall not be commented about in this paper. 

Article 13 of the Directive 2004/25 requires from member states to regulate some other aspects of the takeover 

procedure stated explicitly. The rules refer to emphasising the takeover bid (regulated by Art. 11(1) which refers to 

emphasising the conditional bid, Art. 25 which refers to the withdrawal of the bid and Art. 26 which refers to the 

acceptance of the bid); amendment of the bid (regulated by Art. 14 of the TL); competitive takeover bid (Art. 23 of 

the TL); report on the takeover (Art. 32 of the TL); and to conditional and unconditional takeover bid (Art. 11 of 

the TL). 

Finally, Art. 17 of the Directive 2004/25 requires from member states to impose sanction for the violation of rules 

determined by the Directive, and to ensure that the sanctions are implemented. Article 37 of the TL envisages cases 

in which the bidder and persons who act jointly with the bidder cannot obtain the voting right from all acquired 

shares of the target company, Art. 44–46 envisage criminal offenses for violations of provisions envisaged by the TL, 

and Art. 47–48 envisage appropriate offenses and misdemeanours. 

In view of the above stated, it can be concluded again that, in terms of the takeover, Serbian legislation has adopted 

recommendations and best practice that was codified in the Directive 2004/25 and translated into provisions of the 

TL. 


CONCLUSION 

The above analysis of legal regulations in Serbia has clearly shown that the shareholder in Serbia is protected by legislation 

almost to the same extent as the shareholder in the European Union. If this is true, why is Serbia at the very 

bottom of the list in terms of protection of shareholders according to the Competitiveness Report 2011-2012 of the 

World Economic Forum – 140 th position out of 142 countries included in the Report? 

At the beginning we pointed out that, in order for the shareholder to enjoy effective protection, he/she has to be 

protected primarily by the legal norm, however, the legal norm in itself is not sufficient. More important than the



legal regulation is effective enforcement of the regulation. Enforcement of the legal norms can be voluntary or involuntary. 

To enable those to which the legal norm refers to, to be able to apply it voluntarily, the legal norm needs 

to be legitimate, and to enable effective forced enforcement, coercive institutions (courts) need to have the necessary 

institutional capacity. 

If Serbian legislation is in accordance with best practice, as demonstrated by the analysis, it may be concluded that 

the problem in Serbia is related either to the legitimacy of legal norms or or to the forced enforcement of the law. 

Therefore, the analysis of the Company Law, Law on the Capital Market and the Law on Takeover of Joint Stock 

Companies is fully in accordance with EU Directives in the field of protection of rights of minority shareholders, 

from which follows that the problem of protection of minority shareholders’ rights is probably in the voluntary or 

forced enforcement of the laws. Importance of forced enforcement of the law exponentially grows having in mind the 

fact that it represents a safety net in case of absence of voluntary enforcement of the law. 

Forced enforcement of the law is practised through two types of formal institutions: 1) courts (private enforcement) 

and 2) regulatory (and supervisory) bodies/Security Commission (public enforcement). Private enforcement implies 

forced enforcement of the law by courts. Namely, it directly depends on the private initiative of citizens whether 

courts will forcibly enforce norms of the company law or securities law. Although the state creates rules that regulate 

behaviour of private entities, it leaves to the private entities to initiate the procedure by themselves before relevant institutions 

(primarily courts), if the rules are not adhered to. It is clear that an initiative of private entitites largely depends 

on provided incentives, on their perception of efficiency of courts and legal system in general, on costs, clarity 

of rules, burden of proof, etc. On the other hand, public enforcement is enforcement by a regulatory and supervisory 

body. In case of shareholders’ rights, this role is performed by the Security Commission. 

The authors have concluded that the next step requires a detailed analysis of public and private enforcement practices, 

detection of possible problems in these fields (insufficient capacities, lack of relevant knowledge, need for changes in 

operational terms, etc.), and what steps need to be taken in order to eliminate deficiencies identified by the analysis.


97 

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Journal of Financial Economics, 58, p. 81-112 

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